Pound braces for swings on Brexit divorce deal
LONDON: As the countdown to the Brexit divorce deal’s judgment day begins, pound investors will be following the mood in Parliament to gauge its chances of survival.
Sterling will be vulnerable to swings on signs that lawmaker opposition to the deal is increasing or waning during debates that kick off tomorrow, ahead of a vote a week later.
The deal Prime Minister Theresa May sealed last Sunday with the European Union looks certain to be rejected by parliament in a Dec 11 vote, an outcome that one member of her cabinet signalled on Saturday could lead to a second referendum on Britain’s membership. It’s a result that would also put in danger her leadership of the Conservative Party – and of the country.
“It is impossible to predict when someone could say something that moves the pound,” said Esther Reichelt, a currency strategist at Commerzbank AG.
“We’re basically constantly keeping our eyes on sterling and Brexit-related news flow.”
The uncertainty about the Parliament vote has driven the pound down for a third consecutive week toward US$1.27, leaving it as one of the worst-performing Group-of-10 currencies this year.
A Bloomberg survey of strategists and fund managers saw a 55% chance that lawmakers will reject the divorce deal.
May needs 320 votes for her deal to be approved, and that’s looking unlikely.
While many members of her own Conservative Party are against it, May won backing from two prominent pro-Brexit ministers this week, including International Trade Secretary Liam Fox.
Traders will be watching for details of attempted tweaks to the bill, which could make the agreement more palatable. Both May and her European Union counterparts have said the existing deal is the only one on the table, yet the prime minister has backed down from trying to prevent amendments.
Failure would open up “massively diverging implications” for the pound, ranging from US$1.10 on a no-deal scenario to US$1.35 on a second referendum, according to Neil Jones, head of hedge fund currency sales at Mizuho Bank Ltd.
“The pound should continue to decline this week and into Dec 11 on the principle of uncertainty,” Jones said. “The next two weeks should be very interesting, at the very least will keep volatility alive.”